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Price Analysis for the Portland, Maine Metro Region

Price Analysis for the Portland, Maine Metro Region

October 2007

Home prices in the Greater Portland Metro Region encountered a boom in 2002 to early 2005, but prices have been falling in recent quarters. Homes do not appear to be overpriced. With job gains continuing at a solid pace, home price increases will likely continue, though not at a frenzied pace. A sharp reduction in new-home construction will help control the overall inventory situation. Resetting loans and the rising number offoreclosures related to the subprime fallout are clearly negative factors, but the impact will be offset by the fundamentals of the healthy local economy.

Summary

With job additions continuing (possibly at a faster clip going forward) and mortgages rates hovering at about 6.4% as of early October 2007, the housing market is poised to climb back. With home prices so affordable it is possible to get a spurt. If, however, mortgage rates were to rise to 7.5% or higher, then the housing market would continue to limp along with the possibility that home prices and overall housing wealth could fall. If rates were to move lower, then the market will recover at an even quicker pace. Sales activity has come down and home prices have also been falling in the Portland area. However, the local economy is generating jobs at a healthier pace. The Boston region has picked up strongly, which usually implies that Portland will not be too far behind. The national economy is also fundamentally sound due to rising exports and business spending. Consumer spending will be a bit weaker because of stagnant home price and its accompanying wealth impact. One interesting observation is that the continuing low mortgage rates have not led to more buyers – implying that there is an issue of confidence, or lack thereof – in the homebuying decision. Also, the recent subprime fallout is a concern, though the shakeout will be good for the housing market over the long-run as the market eliminates bad mortgage lenders. Inflation appears to be contained. Both the headline and the core consumer price index decelerated to 2.8% and 2.1%, respectively, over the past 12 months to September. Better yet, most economists anticipate a further deceleration of inflation in 2007. Such an outcome could well lead the Federal Reserve to cut the federal funds and prime rates down the road. A fed funds rate cut is no guarantee of a fall in mortgage rates, but the signal that inflation is contained will force bond buyers to demand lower inflation premium, and hence, lead to lower ortgage rates as well.